Olafur is the author of the forthcoming Bad Economics from Iceland (Searching Finance 2012)

GDP growth in Iceland was 3.1% according to new figures from Statistics Iceland.

The recovery from the -6.8% and -4.0% contraction in 2009 and 2010 respectively looks healthy on paper. But the underlying growth is weak and not sustainable.

The growth seems to be mainly from increased investment. But "the growth in gross fixed capital formation is partly due to imports of ships and aircraft, with marginal impact on GDP. Excluding imports of ships and aircraft, gross fixed capital formation increased by 7.4% in 2011" according to Statistic Iceland. So sorry, that investment didn't create any wages within the Icelandic economy.

Investment continued to be mediocre in 2011. The jump in the last quarter was a one-off investment in the form of importation of ships and aircraft, thereby not contributing to wages or employment in the economy.

The sources of investment (as a % of GDP, 4 qrt. moving average). The State is certainly not doing anything to maintain the level of investment in the economy.

The state of the Icelandic economy is weak, despite the numbers seemingly telling us another story on the surface. The shock to the Gross National Income after the crisis in 2008 is still far from being reversed as the following graphs show. That will not happen until domestic investment projects start for real. They will not start however until interest rate is lowered and debt burden lessened.

The Icelandic economy is stuck in a debt-and-interest-rate trap that causes sluggish investment and low economic growth. The new figures on economic growth do nothing but strengthen that view.

Gross National Income in Iceland (index=100 in 1945). The shock in 2008 will not be properly reversed until investment picks up.

The growth of Gross National Income. The shocks prior to 2008 were nearly always due to fluctuations in fish catches. This time around, it's due to debt and that debt is still around.